Converting From Chapter 13 to Chapter 7 Bankruptcy

While debtors who file Chapter 13 to protect certain assets are usually diligent in making their payments, sometimes the circumstances have a way of interfering with their ability to meet the plan’s requirements.  It is possible that the debtor loses his/her job, missed a few payments, and creditors lifted stay, or the debtor decided that the assets were not worth preserving.  One option that is always available in Chapter 13 is to dismiss the case, which the debtor has a right to do at any time in a Chapter 13. But this may leave you with credit card or other debt, or you may be worried that the house or car will be sold at foreclosure or repossession, or that the lender will go after you for a deficiency. In these cases, the best option is to covert your case to a Chapter 7.

In those situations, the debtor may still seek relief from the bankruptcy court, and convert the case from Chapter 13 to Chapter 7 bankruptcy, provided that the means test can be met. When converting the case from a Chapter 13 to a Chapter 7, there is still some paperwork that needs to be taken care of.  The petition and schedules need to be updated with respect to the property, whether or not it is kept by the debtor.  With respect to any property securing the debt, arrangements must be made with the creditor in order to keep it.

Schedules I and J for your income and budget along with the Means Test have to be updated to reflect that you no longer have the money to make payments in a Chapter 13 case . Once all of the paperwork has been revised, then the debtor must sign the amended schedules, so that they can be filed with the court.

Once the attorney files a Notice of Conversion with the Court and pays the $25 conversion fee, the Court will convert your case to a Chapter 7.  There are also other consequences associated with the conversion. Initially, any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to to the debtor. Any plan payments that are withheld from the debtor’s paycheck will be returned as well. A new Chapter 7 Trustee will be appointed and a new 341 hearing (meeting of the creditors) will be held. The debtor will also have to file a Statement of Intention with respect to any assets subject to creditors’ claims, and also file amended schedules listing any additional debt incurred between the filing of the Chapter 13 and the date of conversion.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Chapter 7 Bankruptcy and Denial of Discharge for Willful or Malicious Injury

One of the limitations on receiving a discharge in a Chapter 7 bankruptcy is that the debtor cannot discharge any debt for willful or malicious injury.

Section 523(a)(6) of the Bankruptcy Code precludes the discharge of a debt “for willful and malicious injury.” As noted by the United States Supreme Court in Kawaahua v. Geiger, 523 U.S. 57, 61 (1998), the “word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” For the same reason, nondischargeability under this section will attach only to injuries that are malicious. In the Second Circuit, the Court of Appeals set the standard for “willful and malicious injury” in its decision in Navistar Financial Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (1996). The Court concluded that “[t]he term ‘willful’ in this context means ‘deliberate or intentional,’” and that “[t]he term ‘malicious’ means wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Id. at 87 (citations omitted).

In a recent case, In re Alessi, Judge Bucki held that the deliberate failure to abide by the terms of the contract, amounted to willful and malicious injury. In Alessi, the debtor, Mrs. Alessi,  not only failed to pay a debt, but a failure to pay from funds that the debtor had agreed specifically to earmark for that purpose. The uncontroverted facts showed that the funds resulting from a real estate transaction were accessible and not otherwise encumbered, that the debtor knew of her obligation to turnover the funds, and that through his counsel, Mr. Alessi made timely demand for payment, even though not obligated to do so. The resulting injury was willful, in that Ms. Alessi deliberately and intentionally refused to turn over the sale proceeds. By violating a contractual provision for use of committed funds, Amy Alessi inflicted a wrongful financial loss without just cause or excuse. Hence, she caused an injury that was malicious within the meaning of section 523(a)(6).

Thus, if you are a debtor, you may have an obligation to follow through on the contracts where the funds are specifically designated for a given purpose.  If you fail to do so, you may be denied a discharge.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Your Homestead Exemption in Chapter 7 Bankruptcy

In New York, the debtors can protect the equity in their residences by utilizing their homestead exemption. Equity is typically defined as the difference between the market value of the property and the debt owed on it. The homestead exemption is one of the most ways to protect your biggest asset, your home, from the claims of your creditors. In New York, an individual debtor can protect up to $50,000 of equity in home by filing Chapter 7 bankruptcy, $100,000 if the debtor spouses are filing jointly. In order to take the benefit of the homestead exemption, the property has to be your residence when you file the bankruptcy.

I am often asked if the debtor can lose the benefit of the homestead exemption.  My usual response is that the debtor could lose the benefit of the homestead exemption only in extreme circumstances. Typically, in order to lose the benefit of the exemption, the debtors must engage in fraudulent conduct or a clear showing of bad faith.  Further, the wrongful conduct must be related to the homestead exemption.

If, for example, you own a $300,000 investment property in addition to your $100,000 residence, but you wrongfully claim in your bankruptcy petition that you live in the $300,000 property, you may lose the right to claim the exemption. As long as the debtor does not lie or attempt to hide the property from the bankruptcy court, the debtor will not lose the homestead exemption.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Discharging Income Taxes in Bankruptcy

There are four general requirements for discharging an income tax in bankruptcy. Initially, the tax must be one for which the return was not last due within three years of the filing of the bankruptcy. Therefore, if a 2006 income tax return was last due on April 15, 2007, the three-year requirement would be met after April 15, 2010.

The “last due” requirement may be complicated by the debtor’s actions. If the debtor requests and receives an extension, the three-year clock starts after the last extension. See In re Wood, 866 F.2d 1367 (11th Cir. 1989). The three-year period is also tolled during the time when the taxing authority is barred from collecting the debt because of a prior bankruptcy.

The second requirement is known as the 240-day rule. For an income tax to be dischargeable, it must not have been assessed with 240 days of the filing of the bankruptcy. When a tax is assessed is sometimes complicated and depends on the practices of the federal or state taxing authority. For federal taxes, the I.R.S. regulations state that “the date of the assessment is the date the summary record is signed by an assessment officer.” This is not the same time as when the return is filed. However, when a return is timely filed, the assessment date is usually around the time a return is filed.

A debtor will know that a tax has been assessed when they are notified by the taxing authority of the tax claim. The exact date of assessment of a federal tax can be obtain by requesting and analyzing a debtor’s tax transcript.

Another related requirement is that, to be discharged in a bankruptcy, an income must not be not yet assessed but be assessable at the time that the bankruptcy is filed. Pursuant to 26 U.S.C. § 6501(a), tax liability must be assessed within “three years after the return was filed….” Therefore, even if a tax has not yet been assessed for some reason at the time a bankruptcy case is filed, and the case postdates the applicable return by three years, this requirement for dischargeability will met.

The third requirement relates to the timing of when the return is filed.  If a return is filed late, it cannot not be filed within two years of a bankruptcy for the tax to be discharged. Under this rule, amended returns are treated as original filed returns. Also, if the debtor provides to the IRS with correspondence containing financial statements with all the information needed to complete a return, this can also be deemed to be a return. The two-year period begins once the taxing authority actually receives the return, and not when the return is mailed, as is the case with timely-filed returns.

The final requirement is the following.  The return must be filed. A substitute return filed by a taxing authority on behalf of a taxpayer is not considered a return for these purposes. There is, however, a split of authority on whether a return filed by a debtor after a substitute return is filed can is considered a return for this test. The return must not be fraudulent and the debtor must not have attempted to evade the tax.

Tax evasion is generally rare and courts disagree on what is deemed to constitute tax evasion for purposes of this test. Tax evasion is found usually in situations where a debtor is hiding assets, constructing complicated transactions for tax purposes, or making false and misleading statements to avoid tax. However, evasion has also been found to exist in some cases in which a debtor has simply not paid a tax while having the ability to do so.

If you have pending tax liabilities, and you believe that you can satisfy all or some of the above requirements, you should meet with a bankruptcy lawyer to determine whether a Chapter 7 bankruptcy will result in a discharge of some or all of your tax liabilities.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Creditor Can’t Contact Debtor After the Bankruptcy Is Filed

When you file your bankruptcy case,the creditors must stop calling you.  They can’t continue garnishing your wages.  They must stop all collection activities because every bankruptcy case protects the debtor with the “automatic stay.”   The automatic stay prohibits creditors from taking  actions against you, unless they obtain a permission from the bankruptcy court.

While there are some exceptions, primarily for matters involving marital obligations, otherwise known as “domestic support obligations”, for most people and most debts, bankruptcy provides real relief.

If creditors keep calling you, mailing you, garnishing your wages or taking other actions against you, call your lawyer immediately.  Regardless of whether the creditors acted with or without the knowledge of your filing, a bankruptcy lawyer make them stop.  Also, regardless of whether the creditors acted with or without the knowledge of your filing, the creditors may be liable for actual and even punitive damages as well as attorneys fees.

Section 362 of the US Bankruptcy Code states that § 362. Automatic stay states that the filing of a petition in bankruptcy operates as a stay “applicable to all entities, of the commencement or continuation, of any action against the debtor.” Section 362(k) states that an individual injured by any willful violation of a stay shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

So what’s a willful violation of a stay? The creditor needs to know that you have filed for bankruptcy. It must take an action to collect against the debtor after that stay is in effect. The creditor doesn’t need to willfully violate the stay, it needs to willfully take the action. That means the creditor needs to send out the collection letter after that creditor knows of the stay.

Here in Rochester, Judge Ninfo addressed the issue of willful violation of automatic stay in In re Engel, holding that mailing of a billing statement after the bankruptcy was filed was a willful violation of automatic stay.  In Engel, the creditor was listed in bankruptcy schedules and was also contacted by the debtor’s attorney who demanded that the creditor stop any and all contact with the debtor. Even after the debtor’s attorney notified the creditor, the creditor mailed two additional billing statements.  While the creditor claimed that the contact with the debtor was an unintentional mistake, the court found that the creditor’s actions were intentional and ordered a hearing on damages.    

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Chapter 7 Bankruptcy and Reaffirmation Agreement

When you file a Chapter 7 bankruptcy case, as a part of your petition, you also file a statement of intention with respect to property that is secured by consensual liens. That means that you have to inform the bankruptcy court here in Rochester what you intend to do with such property, such as your home that has a mortgage, your car, if it has a loan associated with it that is secured by a lien, or any other property in which your creditor has a valid security interest.  You are given a choice of whether to continue to pay on such obligations or to, if you do not wish to sign a reaffirmation agreement, to allow the creditor to take the property back.  A reaffirmation agreement in bankruptcy is a new contract signed between you and a lender that reaffirms your debt and personal liability for the obligation. The law requires you to “perform” your intentions regarding financed personal property within 45 days of the Meeting of Creditors (341 Meeting) or the automatic stay terminates.  Before signing a reaffirmation agreement, it is a good idea to discuss it with your bankruptcy lawyer as it is a binding legal document.  You can revoke it within 60 days after signing.  It is not difficult to revoke the reaffirmation agreement since all that is needed, is a letter saying “I don’t want this agreement”, with the letter being sent to the court and to the creditor.

The Bankruptcy Reform Act of 2005 (“BAPCPA”) states that any reaffirmation agreement(s) must be entered into prior to the filing of a discharge in bankruptcy. The reaffirmation agreement must also be approved by the court and not rescinded by the debtor prior to the discharge being filed. The court can also refuse to sign the reaffirmation agreement, if it is of the opinion that the debtor cannot afford the payments called for under its terms. Some lenders state they will repossess vehicles unless the debt is timely reaffirmed. Other lenders  feel that it is better to receive monthly payments rather than lose money by selling repossessed vehicles at auction prices.

As a debtor, there is little risk in signing a reaffirmation agreement provided that you feel you really need the property (such as a car or a home) and you know you can afford the payment.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Pay Stubs Requirement and Bankruptcy

One of the current requirement under BAPCPA is that a debtor must file all of their pay advices (pay stubs) for the 60 days preceding the filing with their bankruptcy petition. What happens if a debtor or his/her attorney omits one or more pay advices (pay stubs)? The answer to that question is that under the statute, it is a serious problem and the bankruptcy judge may dismiss your case.

However, some debtors are either unemployed at the time of the filing, or receiving unemployment, workers’ compensation or social security benefits, and therefore do not have pay stubs that can be filed.

In In re LaPlante, Judge Bucki held that because section 521(a)(1)(B)(iv) requires the filing only of those payment advices that a debtor receives from an employer, section 521(i) cannot effect the dismissal of a case filed by a debtor without income as an employee. Neither the Workers’ Compensation Board nor the Social Security Administration are employers of the debtor, and therefore the 60 day requirement is not applicable.

Thus, if you are receiving workers’ compensation benefits, social security or other non-employer payments, it is important to tell your bankruptcy lawyer about it in advance, so that appropriate documents are filed with your bankruptcy petition.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Workers Compensation and Chapter 7 Bankruptcy

If you file a Chapter 7 bankruptcy, what happens if you have a pending workers’ compensation claim?  Generally, if you file for bankruptcy in New York, any money received as certain public benefits is usually exempt.  However, workers’ compensation claims can result in significant lump-sum awards and a bankruptcy trustee may file an objection to the debtor claiming such award as exempt.

Here in Rochester, Judge Ninfo dealt with a similar situation in In re Herald, and his decision resolved these issues in Western New York. In order to resolve this issue in favor of the debtor, Judge Ninfo had to find that worker’s compensation award fell within the scope of §282.2(c) of New York’s Debtor Creditor Law, which exempts benefits received as a result of “disability, illness or unemployment benefit.”

After analyzing the legislative history of §282 of New York’s Debtor Creditor Law, Judge Ninfo concluded that the legislative intent was to exempt workers’ compensation proceeds.  He further noted that in some situations this may give a debtor a head start, as opposed to a fresh start,  where the debtor will receive a significant award after the bankruptcy filing, but found that any such award to be exempt nonetheless.

Thus, if you have a workers’ compensation case pending or your are receiving worker’s compensation payments, you can file a Chapter 7 bankruptcy and keep the award when you receive it.  It is important to tell your bankruptcy lawyer about it in advance, so that the workers’ compensation claim is listed as exempt on your bankruptcy petition.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Chapter 7 Bankruptcy and Tax Refunds

If you file a bankruptcy case between January and April, you may be expecting a tax refund.  Your Chapter 7 bankruptcy trustee may try to take your tax refund from you.  Tax refunds are probably the largest single type of asset which debtors lose in bankruptcy.   In New York, the tax refund may protected by your cash exemption up to $2,500, if you are not claiming a homestead exemption.

If only one spouse is filing for bankruptcy, and they file a joint tax return, Rochester Chapter 7 trustees usually take position that one half of the refund belongs to the trustee, subject to the applicable exemption.

In addition, here in Rochester, some of the Chapter 7 trustees frequently ask for a copy of the debtor’s income tax return for the year the bankruptcy is filed in.  This request may make place early in the year, even though the tax return would not be filed several months later.  The trustees’ goal is to see whether or not  a portion of the income tax refund can be pro rated from the beginning of the year to the date of filing bankruptcy.  If this prorated portion of the income tax refund is large enough, the trustee may make a demand that a portion fo the refund be turned over to the trustee.

One way of dealing with these issues is to wait to file your bankruptcy until after the tax refund was spent on family necessities.  It is important to disclose the tax refund to your lawyer and the trustee, since a bankruptcy trustee can simply write to the Internal Revenue Service and have it send the tax refund directly to the trustee, and a deliberate failure to disclose information can be a basis for a denial of discharge.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Chapter 13 Bankruptcy and Property Tax Arrears

Because most mortgages contain real estate tax escrow provisions, there are not as many Chapter 13 debtors who have unpaid real estate taxes due when they file their Chapter 13 plans as there are debtors who have mortgage arrearages.  However, Chapter 13 debtors frequently do have significant unpaid real estate taxes due on their residences, and in many cases,  the need to pay these unpaid real estate taxes over time in order to save their homes is one of the primary purposes of the Chapter 13 filing.

If you are filing Chapter 13 bankruptcy, and you have real property tax arrears, a typical plan will provide for a payment of such arrears in full over the life of the plan.  Local municipalities, to whom such taxes are owed, will be treated as secured creditors under the plan and will receive full payment of taxes owed.  In addition, any such municipality will be entitled to interest on the money owed.

Here in Rochester, local municipalities usually receive 18% interest rate on the real property tax arrears.  Once the bankruptcy is filed, any such arrears will be subject to the New York State judgment interest rate of 9%.  Judge Ninfo has previously addressed this issue in In re Clark, holding that the statutory rate is an appropriate post-confirmation interest rate under Section 1325(a)(5)(B)(ii) to be paid.

In view of the above, a bankruptcy lawyer must make sure that the proposed plan allows for full repayment of property tax arrears, together with appropriate interest, and that the debtor is able to afford payments under the plan.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.